Opinion
Civil No. 04-3813 (DWF/JSM).
April 28, 2005
Jonathan M. Bye, Esq., Lindquist Vennum PLLP, on behalf of Plaintiff.
Bradley J. Lindeman, Esq., Michael D. Hutchens, Esq., and Sarah E. Larson, Esq., Meagher Geer, PLLP, on behalf of Defendant.
MEMORANDUM OPINION AND ORDER
Introduction
The above-entitled matter came on for hearing before the undersigned United States District Judge on March 23, 2005, pursuant to a Motion for Summary Judgment brought by Plaintiff Enpath Medical, Inc. ("Enpath"). Enpath brings the current motion alleging that Defendant NeuroControl Corporation ("NeuroControl") breached a contract between the parties. NeuroControl opposes the motion claiming that the contract at issue was the product of corporate self-dealing and that the damages provision of the contract is unenforceable, unsupported by consideration, and against the interests of public policy. For the reasons set forth below, the Court denies Enpath's Motion for Summary Judgment.
Background
Plaintiff Enpath is a Minnesota corporation with its principal place of business in Plymouth, Minnesota. Enpath is a supplier of components used in medical devices.
Defendant NeuroControl is an Ohio corporation with its principal place of business in Valley View, Ohio. NeuroControl develops and sells certain medical devices.
In October 1999, BIOMEC, Inc. ("BIOMEC"), purchased stock from NeuroControl. When BIOMEC became a shareholder of NeuroControl, BIOMEC's chairman, Trevor Jones, was appointed to serve on NeuroControl's board of directors. After BIOMEC's initial investment in NeuroControl, BIOMEC purchased additional convertible promissory notes in NeuroControl.
Beginning in 1999, NeuroControl and BIOMEC entered into a series of purchase agreements ("the Purchase Agreements"). Pursuant to the Purchase Agreements, NeuroControl agreed to allow BIOMEC the opportunity to bid on NeuroControl's production requirements. NeuroControl agreed to accept BIOMEC's bids so long as the bids were competitive and would be in the best interests of NeuroControl.
Enpath was assigned BIOMEC's rights and obligations under the Purchase Agreements.
In 2001, a Third Amended Purchasing Agreement was executed by the parties. The Third Amended Purchasing Agreement provided that NeuroControl would purchase $500,000 worth of product from BIOMEC in 2001.
In 2002, Jones became aware that NeuroControl was contemplating producing a product known as RestoreSTiM. The RestoreSTiM system is a subcutaneous electrical stimulation device for stroke victims. The device is to be inserted into the arm or shoulder of a stroke victim for a period of six weeks.
NeuroControl began to solicit bids for the RestoreSTiM project. Initially, BIOMEC was denied the opportunity to bid on the project because NeuroControl did not believe BIOMEC was qualified to produce the product. However, BIOMEC subsequently submitted a bid for the project. Later, Jones learned that NeuroControl had awarded the contract to a third-party, MedSource.
NeuroControl asserts that when Jones learned that BIOMEC had not been awarded the contract, he confronted NeuroControl's president and chief executive officer, J.B. Richey. Jones told Richey that failure to award the RestoreSTiM contract to BIOMEC would result in BIOMEC invoicing NeuroControl for the approximately $370,000 that BIOMEC believed it was owed under the Third Amended Purchasing Agreement. In response, Richey cancelled the MedSource agreement and awarded the production contract to BIOMEC.
On September 12, 2002, NeuroControl sent BIOMEC a letter outlining the terms of the supply agreement ("the Supply Agreement"). The Supply Agreement called for BIOMEC to produce 1,500 units of the RestoreSTiM system for NeuroControl at a total production cost at completion of $470,670. On September 18, 2002, BIOMEC and NeuroControl amended the Supply Agreement to provide that the minimum purchase requirement would be modified by BIOMEC's actual tooling, validation, and sterilization costs. BIOMEC's quote placed these costs at $73,730. However, NeuroControl contends that BIOMEC expended only $8,036 towards these areas.
In February 2003, the parties signed a Supplement to Supply Agreement ("the Amended Supply Agreement"). The purpose of the Amended Supply Agreement was to resolve a "desire for greater detail" between the parties. The Amended Supply Agreement provided:
Purchase Requirements. Subject to the terms and conditions of the Amended Supply Agreement, on or before December 31, 2003, Purchaser shall purchase the Products and Services described in the Amended Quote attached as Exhibit A, which shall equal or exceed, in the aggregate, the amount of four hundred seventy thousand, six hundred seventy dollars ($470,670.00) (the "Minimum Purchase Commitment"). The Amended Supply Agreement was entered into as a means to resolve a dispute between the parties and Purchaser's obligation to pay the Minimum Purchase Commitment is absolute. If Purchaser does not purchase the minimum amount of four hundred seventy thousand, six hundred seventy dollars ($470,670.00) by December 31, 2003, Purchaser shall pay to Supplier on December 31, 2003 an amount equal to the difference between: (1) the Minimum Purchase Commitment and (b) the amounts that Purchaser has paid to Supplier under the Amended Supply Agreement through December 31, 2003, which amount is the "Default Payment."
On April 7, 2003, NeuroControl issued a purchase order to BIOMEC pursuant to the parties' agreement. The purchase order requested 1,300 electrodes from BIOMEC. NeuroControl asserts that BIOMEC did not fulfill the terms of the purchase order. On October 31, 2003, NeuroControl withdrew the April purchase order and replaced it with a revised order for 1,787 electrodes. On December 29, 2003, BIOMEC delivered 420 electrodes to NeuroControl. NeuroControl contends that BIOMEC did not fulfill the request for the remaining electrodes. In January and February of 2004, Jones began to demand payment pursuant to the Amended Supply Agreement.
Enpath commenced this suit alleging breach of contract arising from its Purchase Agreements with NeuroControl. Enpath claims that it is entitled to summary judgment as to the entire amount of the minimum purchase agreement excluding the costs of products and services requested by NeuroControl. NeuroControl opposes the motion asserting that fact issues remain to be resolved and that the minimum purchase provision is invalid because it is an unenforceable penalty clause and it is not supported by consideration.
Discussion
I. Standard of ReviewSummary judgment is proper if there are no disputed issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The court must view the evidence and the inferences that may be reasonably drawn from the evidence in the light most favorable to the nonmoving party. Enter. Bank v. Magna Bank of Missouri, 92 F.3d 743, 747 (8th Cir. 1996). However, as the Supreme Court has stated, "[s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed 'to secure the just, speedy, and inexpensive determination of every action.'" Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986) (quoting Fed.R.Civ.P. 1).
The moving party bears the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Enter. Bank, 92 F.3d at 747. The nonmoving party must demonstrate the existence of specific facts in the record which create a genuine issue for trial. Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995). A party opposing a properly supported motion for summary judgment may not rest upon mere allegations or denials, but must set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986); Krenik, 47 F.3d at 957.
II. Validity of the Minimum Purchase Provision
Enpath asserts that the Amended Supply Agreement is an alternative performance, or "take-or-pay," contract that is enforceable according to its terms. According to Enpath, the minimum purchase provision in the contract that requires NeuroControl to pay for products and services that it does not take is not a liquidated damages or penalty provision, but rather is an alternative means that NeuroControl may choose to perform its obligations under the contract. NeuroControl contends that the minimum purchase provision is a penalty provision. Therefore, NeuroControl asserts that the minimum purchase provision is unenforceable.
As a preliminary matter, the Court agrees with the parties that Ohio law governs this dispute.
Professor Williston describes alternative performance contracts as such:
A contract may give an option to one or both parties to either perform a specified act or make a payment. Although this form of contract cannot be used as a cover for the enforcement of a penalty, if on a true interpretation, it appears that it was intended to give a real option, that is, that it was conceived possible that at the time fixed for performance, either alternative might prove the more desirable, the contract will be enforced according to its terms.
14 Williston on Contracts § 42:10 (4th ed. 2004).
Enpath asserts that the Amended Supply Agreement's minimum purchase provision is similar to "take-or-pay" provisions that have been upheld by courts in oil and gas contracts or to termination or cancellation fees that are often found in corporate contracts. Courts have recognized the utility of "take-or-pay" contracts in the oil and gas industry as such contracts serve to allocate risk among the parties. Superfos Inv. Ltd. v. FirstMiss Fertilizer, Inc., 821 F. Supp. 432, 435 (S.D. Miss. 1993); see also Universal Resources Corp. v. Panhandle Eastern Pipe Line Co., 813 F.2d 77, 80 (5th Cir. 1987); Prenalta Corp. v. Interstate Gas Co., 944 F.2d 677, 688 (10th Cir. 1991). However, in this case no such allocation of risk occurs as a result of the contract.
Moreover, oil and gas contracts also differ from the Purchase Agreements at issue in this case because oil and gas contracts often have "make-up" provisions that render a payment made by a party to operate as a credit toward future purchases of goods or services. Superfos, 821 F. Supp. at 436. In this case, the Purchase Agreements do not provide that NeuroControl's payments will operate as a credit towards its future purchases of goods and services from Enpath.
The Court finds more similarities between the Amended Supply Agreement's "take-or-pay" provision and the termination or cancellation fee provisions commonly found in corporate agreements. Termination or cancellation fees in corporate contracts compensate a would be purchaser for the purchaser's lost time and opportunities in the event a corporate transaction cannot be completed. Gray v. Zondervan Corp., 712 F. Supp. 1275, 1276 n. 1 (W.D. Mich. 1988). In this case, Enpath asserts that it invested $2 million in NeuroControl in part because NeuroControl committed itself to purchasing good and services from Enpath. Enpath implies that it passed on other corporate opportunities by investing in NeuroControl.
The Court agrees with Enpath's assertion that the minimum purchase provision resembles a termination or cancellation fee provision. However, the similarity of these provisions to one another does not immediately lead to the conclusion that the minimum purchase provision at issue in this case is valid. Instead, courts that have examined termination or cancellation fee provisions have considered the reasonableness of such provisions when determining their validity. St. Jude Med., Inc. v. Medtronic, Inc., 536 N.W.2d 24, 27 (Minn.Ct.App. 1995) (citing Cottle v. Storer Communication, Inc., 849 F.2d 570, 578-79 (11th Cir. 1988)); see also Samjens Partners I v. Burlington Indus., Inc., 663 F. Supp. 614, 623-24 (S.D.N.Y. 1987).
Rather than considering the reasonableness of the minimum purchase provision alone, the Court will conduct the reasonableness inquiry in light of the three-factor test set out in Ohio law for determining whether a contract provision is a valid stipulated damages provision or an invalid penalty provision. Under Ohio law, a stipulated damages provision in a contract should be treated as a valid liquidated damages provision and not as a penalty if: (1) the damages would be uncertain as to amount and difficult of proof; (2) the contract as a whole is not so manifestly unreasonable in amount as to justify the conclusion that the contract does not express the true intention of the parties; and (3) the contract is consistent with the conclusion that it was the parties' intent that damages in the amount stated should follow the breach thereof. Lake Ridge Acad. v. Carney, 613 N.E.2d 183, 188 (Ohio 1993).
Enpath goes to great lengths to convince the Court that the contract at issue is an alternative performance contract and that the minimum purchase provision is not a liquidated damages provision. However, alternative performance provisions, such as termination or cancellation fee provisions, are analogous to stipulated damages provisions, Cottle, 849 F.2d at 578, and the reasonableness determination is at the heart of an inquiry into whether either provision is valid.
Enpath asserts that the damages were uncertain because "it involves calculating the value not just of what BIOMEC/Enpath lost by not providing the agreed-upon items, but also the value of what BIOMEC released and terminated by entering into this agreement." (Plaintiff's Reply Memorandum In Support of Summary Judgment at 7.) NeuroControl simply argues that Enpath is aware of the profit margin it would have received had NeuroControl purchased the necessary quantity of goods.
The Court finds that Enpath's damages were ascertainable. First, the Court disagrees with Enpath's assertion that the contract's value should be weighed in terms of both the purchase price and the claims that Enpath gave up when it entered into the contract. The Court finds that unless proven otherwise the damages Enpath suffered as a result of the breach are solely to be found in the failure of NeuroControl to purchase the agreed upon amount of products and services. Second, the Court disagrees with Enpath's assertion that such damages were not ascertainable. The Court finds it difficult to believe that Enpath, or any business for that matter, would prepare a bid for over $400,000 worth of products or services without calculating and closely watching its profit margin in the manufacturing process. The Court also notes that Jones, BIOMEC's chairman, testified that Enpath's gross profit after completion of the contract would likely have been between 25-35% of the purchase price. (Affidavit of Bradley J. Lindeman, ¶ 3, Ex. A, at 107.)
The second factor to consider is whether the contract as a whole is so unreasonable in amount as to justify the conclusion that the contract does not express the true intention of the parties. Enpath again asserts that the amount of the minimum purchase provision is reasonable in light of Enpath's release of previous claims against NeuroControl. In contrast, NeuroControl points to the fact that the actual damages suffered by Enpath as a result of NeuroControl's failure to comply with the Performance Agreements bear no relationship to the actual damages that Enpath suffered as a result of the breach.
The Court agrees with NeuroControl that the minimum purchase provision's terms are manifestly unreasonable in light of the actual damages that Enpath suffered as a result of NeuroControl's breach of the Amended Supply Agreement. Enpath directs the Court's attention to the Minnesota Court of Appeals' decision in St. Jude Medical, 536 N.W.2d at 28, in which the court found that a $3 million termination fee was reasonable in light of the $90 million contract at issue. However, in this case the $470,670 payment option is equal to the purchase amount in the contract and is a much larger percentage of the total contract at issue even when Enpath's total investment in NeuroControl is considered.
The third factor courts must consider is whether the contract is consistent with the conclusion that it was the parties' intent that damages in the amount stated should follow the breach thereof. In examining this factor, courts consider the clarity of the contract language and whether the parties bargained over the language of the contract provisions at issue. In this case, the Amended Supply Agreement's minimum purchase provision is clear. However, both parties acknowledge that the Amended Supply Agreement must be considered in context of the Purchase Agreements that stretch back as far as 1999. Based on a review of the prior agreements, the Court finds little evidence that the language of the minimum purchase provision as it is found in the Amended Supply Agreement was subject to much, if any, negotiation between the parties.
After reviewing the Purchase Agreements and the deposition testimony of the parties, the Court finds that the minimum purchase provision's payment option is not a true alternative form of performance or a valid stipulated damages provision. Instead, the payment option is an invalid penalty provision. Accordingly, the minimum purchase provision's payment provision is invalid and Enpath's Motion for Summary Judgment is denied.
Conclusion
The Court believes it is in the best interests of the parties to negotiate a resolution of this dispute among themselves given that the only issue that remains to be resolved is that of damages. As the parties are already aware, Magistrate Judge Janie S. Mayeron is available to assist in the negotiation of a settlement should the parties find such services helpful. If the Court may be of assistance in this matter, the parties should contact Lowell Lindquist, Calendar Clerk for Judge Donovan W. Frank at 651-848-1296, or Katie Haagenson, Calendar Clerk for Magistrate Judge Janie S. Mayeron at 651-848-1190.
For the reasons stated, IT IS HEREBY ORDERED:
1. Plaintiff Enpath Medical, Inc.'s Motion for Summary Judgment (Doc. No. 13) is DENIED.